CF Industries Holdings (CF), an Illinois-based manufacturer and distributor of fertilizer products, is a company with an undervalued stock, though its fundamentals actually look great. There are also several positive points of interest that makes CF an ideal candidate for a call option.
Founded in 1946, it has a long history of operations, and it is a very simple business that engages in one of the most necessary forms of enterprise in history: fertilizer.
With an $11.8 billion market cap, it is the second-largest publicly traded nitrogen fertilizer producer in the world and the third-largest producer of phosphate fertilizer.
Buybacks and Growth
The company considers itself undervalued and has embarked on a $3 billion stock buyback program. Given the repurchases this year alone are nearly $1.1 billion, CF Industries may be done sooner than its 2016 target date.
CF Industries is also investing in expansion: It’s one of the first companies bringing on new fertilizer capacity in North America.
Fundamentals Look Great
Its annual dividend yield is 0.8%, but it’s trading at a significant discount to its historical average, with a current P/E ratio of 6.5 compared with a five-year average of 11.1.
To top this off, the company has an ROE of 29.2%, an operating margin of 34.4%, a net profit margin of 19.2%, and a free cash flow margin of 22.7%. This is all on top of trading at a paltry 6.8 times earnings!
Hedge Funds Support CF
Heading into Q3, many of the hedge funds were long in CF, an increase of 12% from the first quarter. With the smart money’s sentiment swirling, there exists a few key hedge fund managers who were increasing their stakes considerably.
Renaissance Technologies holds the biggest position in CF Industries with a $190.5 million position in the stock, comprising 0.5% of its 13F portfolio. The second largest stake is held by ValueAct Capital,which held a $171.5 million position; 1.8% of its 13F portfolio is allocated to the stock. Other hedgies with similar optimism include Adage Capital Management, Third Point and D.E. Shaw.
Crossed the 200 Day Moving Average
In trading on Monday, shares of CF Industries crossed above their 200 day moving average of $196.85, changing hands as high as $203.19 per share. The chart below shows the one year performance of CF shares, versus its 200 day moving average:
Looking at the chart above, CF’s low point in its 52 week range is $169.33 per share, with $233.43 as the 52 week high point — that compares with a last trade of $206.54.
Continuity of Management
The longtime chief executive of CF Industries Holdings will retire and be replaced internally, just as it carries out a $3.8-billion expansion.
Tony Will, 48, the senior vice-president of manufacturing and distribution at the Deerfield, Illinois-based company, will replace CEO Steve Wilson, 64, on Jan. 1, 2014.
Wilson, CF’s CEO for 10 years, will stay on as a director and serve as non-executive chairman.
Joel Jackson, an analyst at BMO Nesbitt Burns, doubts this will be a major shakeup, since Will comes from the manufacturing side of CF Industries. “I don’t know if we should expect any seismic change at CF anytime soon,” Jackson said in a press release.
Therefore, take advantage of the positives flowing from CF and execute the following options call:
OPTIONS TRADE: Buy the CF Jan 2014 240.000 call (CF140118C00240000) at or under $2.50, good for the day. Place a protective stop limit at $1.00 and a pre-determined sell at $3.80.